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Expect changes to China's economic diplomacy with Africa

Thursday August 27 2015

By KWAME OWINO
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There is no greater sign of China’s economic significance than the number of analyses asking how major economies in the world should respond, given a reduction in the momentum of the country’s economic growth.

This will not be a regular year for the economy of China and many of its neighbours. Indeed, there are reactions in stock exchanges in Europe and the United States due to the sharp decline in Chinese markets earlier in the week.

The question to ask, then, is what the effects of a policy reaction by other countries will have on the African continent generally, as well as those countries that have been proudly “Looking East”.

The primary lesson is that all long runs of high economic growth rates will end. China has had a growth of 10 per cent per annum for a whole generation, based on a platform of large infrastructure investments and manufactured exports.

This policy has worked spectacularly for China, and not only provided employment opportunities but also enabled the country to reduce poverty rates very fast.

Any bet that China has entered into a new period with growth pace that would be lower than double-digit is sensible.

For African nations that have recently thought of playing China against the West, it may be time to dust up and reconsider that policy. This is because even if the worst were to happen and a full-blown recession was to affect China’s economy, it would emerge from that in the medium term.

What will change is China’s commitment to economic diplomacy with more keenness to make choices for its economic assistance among African countries.

This is because there will of be a shortage of funds, requiring that existing funds be used to support projects with higher yield. For Kenya specifically, all projects such as port and other flagship projects under the Vision 2030 may need to be prioritized tightly.

As explained above, the flow of assistance coming from China’s public companies will be better targeted, if not altogether reduced. The implication is that the question of whether China would drag sub-Saharan Africa into the modern economy is now answered. It will not be possible for China alone to ensure Africa’s modernization. Kenya must diversify its economic partnerships by improving its economic diplomacy.

While the United States and European nations suffered from the last recession in 2008, China and many African countries did not suffer much from the primary effects. China has been a leading importer of the primary agricultural and mineral products that African nations exported in the last decade.

An investor gestures as he checks share prices
An investor gestures as he checks share prices at a securities firm in Shanghai, China on August 26, 2015. The dollar slipped in Asia Monday on fears that China's economic malaise could drag on global growth. AFP PHOTO

For that reason, it has contributed to growth in the continent. In Kenya’s case, the trade balance is in China’s advantage but there has been an interest in growing both the commodity trade in minerals and rare earths, and attraction of tourists from China.

What this means is that both Kenya’s exports into China may face lower demand, while an extended recession may affect the ability of Chinese tourists to travel to Kenya until China achieves economic recovery.

There is a remote, but real possibility that China’s economic problems will extend beyond its borders and fan a proper economic recession. The government of China is taking the early signals seriously and responding through a series of macroeconomic tricks, such as currency devaluation and directing savings towards the purchase of shares in the exchanges.

These responses may succeed but what is bound to drive a crisis is the level of debt and intense investment in physical property.

The value of some property in the major cities of China is close to 50 times the annual income of workers, with more added at a furious pace.

This is a quality of the debt and property nexus that is shared with Kenya, where the costs of acquisition of property in the major cities is a signal that there is over exuberance in the property markets. Like in China’s case, overpriced property will have its defenders arguing that growth is happening and that there’s a growing middle class yes, but the simple ratio of income to prices tells one that a painful adjustment is due.

In conclusion, it is too early to tell with certainty the direction and size of the shock affecting China’s economy. What is less certain is that the principles that informed the growth in the form of massive infrastructure investment, aggressive property development and a focus on exports at all costs have reached their limits.

It does not affect China’s greatness, but the situation teaches that the laws of economics will always call back.

Kwame Owino is the Chief Executive Officer of the Institute of Economic Affairs (IEA-Kenya), a public policy think tank based in Nairobi. Twitter: @IEAKwame